Defence Acquisition Procedure 2020 (DAP2020) came into effect on 1st October 2020 and superceded the Defence Procurement Procedure 2016. DAP would remain in force till 30 September 2025 or till reviewed. The spirit of this policy is a self-reliant India and growth through the ‘Make in India” programme so that India is a US$ 5 trillion economy. The policy introduces conceptual, structural and procedural reforms to promote domestic defence manufacturing but at the time to ensure that the contemporary technology and equipment are made available to the Indian Defence Services in a time-bound manner. Though India has a huge public sector base in defence manufacturing, the DAP 2020 expects that foreign manufacturers will set up shops in India following the increased limit of Foreign Direct Investment to 74% by the automatic route and 100% with Government approval as per the new FDI policy by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, which came in to force on 15th October 2020.
The DAP 2020 focuses on self-reliance where indigenisation and innovation are enabled through ‘Make’, ‘Design & Development’ and ‘Strategic Partnership Model’ rather than only ‘Buy’ to develop long-term indigenous capabilities
One of the key focus areas of DAP2020 is “Ease of Doing Business” with simplified procedures, delegation and making the whole procurement process Industry friendly.
Changes in Procedures
1. A single-stage approval process for cases with Approval of Necessity(AoN) value of up to ₹ 300 crores and for AoN value ≤ 100 crores preferences will be given to MSMEs provided there are at least two eligible MSMEs.
2. The timelines for the validity of AoN and approval at different stages are defined to reduce the overall approval cycle time
3. There are Fast Track Procedures defined for AoN where expeditious procurement for urgent operational requirements are foreseen as imminent
4. Acquisition Planning Process are redefined as 10 years Integrated Capability Development Plan (ICDP) for the long-term (brought down from 15 years of Long Term Integrated Perspective Plan of DPP2016), Five years Defence Capital Acquisition Plan (DCAP) for medium-term and Two years Annual Acquisition Plan (AAP) for the short-term
Preference to Indian Vendors
a) Buy (Indian-IDDM) Indigenous design and Indigenous Content (IC) ≥ 50% (was min.40% in DPP 2016)
(b) Buy (Indian) In case of indigenous design (IC) ≥ 50%, otherwise (IC) ≥ 60% (was min.40% in DPP 2016)
(c) Buy and Make (Indian) (IC) ≥ 50% of the ‘Make’ portion (was min.50% in DPP 2016)
(d) Buy (Global – Manufactured in India) (IC) ≥ 50% (was not defined in DPP 2016)
(e) Buy (Global) Foreign Vendor – Nil,
Indian Vendor ≥ 30% (was not defined in DPP 2016)
For the DAP 2020, Indigenous Content (IC) for acquisition case shall be arrived at based on the Base Contract Price (i.e. the Total Contract Price less taxes and duties) of that equipment/item by excluding the following elements of manufacturing/production/assembly:
(a) Direct costs (including Custom Duties, Freight/transportation and insurance) of all materials, components, sub-assemblies, assemblies and products imported into India.
(b) Direct and Indirect costs of all services obtained from non-Indian entities/citizens.
(c) All license fees, royalties, technical fees and other fees/payments of this nature paid out of India, by whatever term/phrase referred to in contracts/agreements made by vendors/sub-vendors.
Make & Innovation
The ‘Make’ Categories aim to achieve the objective of self-reliance by involving
greater participation of Indian industrial eco-system including private sector through the
(a) Make-I (Government Funded). Projects involving design and development of equipment, systems, major platforms or upgrades thereof by the industry. For Projects under the Make-I sub-category, MoD will provide financial support up to 70% of prototype development cost or a maximum of ₹ 250 crores/Development Agency
(b) Projects Under Make II and Make III. Projects under Make II and Make III would encompass equipment/ system/ platform or their upgrades or their subsystems/sub-assembly/ assemblies/ components/ materials/ ammunition/ software, primarily for import substitution.
(i) Make-II (Industry Funded). This would include design and development and innovative solutions by an Indian vendor, for which no Government funding will be provided.
(ii) Make-III. This although would not be designed/developed indigenously but can be manufactured in India as import substitution for product support of weapon systems/equipment held in the inventory of the Services. Indian firms may manufacture these either in collaboration or with Transfer of Technology (ToT) from foreign OEMs. In this category, an Indian vendor can enter into a JV with OEM.
Innovation & Indigenisation Organisation (IIO) at each of the Service Head Quarters (SHQ) for spearheading innovation & indigenisation would identify projects for Indigenous Design and Development including import substitutions. IIO would plan, consult with all stakeholders, employ project/programme implementation experts, as also the latest execution/monitoring techniques and software to ensure timely development and implementation.
Leasing has been introduced as another category for acquisition in addition to the existing ‘Buy’ and ‘Make’ acquisition categories as it provides for an innovative technique for financing the equipment/platforms. Leasing provides means to possess and operate the asset without owning the asset and is useful to substitute huge initial capital outlays with periodical rental payments. Leasing would be permitted in two sub-categories i.e. Lease (Indian), where Lessor is an Indian entity and is the owner of the asset, and Lease (Global).
Incentives for MSMEs –
Projects under the Make categories, with procurement not exceeding Rs 100 Cr/year based on delivery schedule at the time of seeking AoN will be earmarked for MSMEs. However, if at least two MSMEs do not express interest in a Make programme earmarked for them, the same shall be opened up for all, under the condition that interested MSME(s), if any at that stage and meeting the eligibility criteria, will get preference over non-MSMEs in the selection of DAs.
MoD has set up Innovations for Defence Excellence (iDEX) initiative under the Defence Innovation Organisation (DIO) and Technology Development fund (TDF) under DRDO to use a multi-pronged approach and reach out/engage a large pool of innovators/ technocrats/ professionals/academicians including amongst the smaller enterprises, start-ups and MSMEs, to foster innovation in a coherent, strategized, and integrated manner. SHQs also undertake Innovations through their internal R & D organisations.
Design & Development
Procedures are set forth for the acquisition of systems designed and developed by DRDO/DPSU/OFB to help implement “Make in India” with indigenous technology in ti Indian industry.
Revised Offsets Policy
In the Defence industry, the foreign manufacturer of the Defence equipment offsets the
nation’s costs of acquiring Defence equipment by various avenues, including purchasing or
agreeing to purchase products from domestic vendors, making an investment in the Defence sector or by transfer of technology, amongst others. Offsets policy essentially means benefits that a buyer gets from the seller in the form of technology that leads to building capability or capacity locally. The purpose of an offset obligation is to ensure that a part of government spending on the capital acquisition of Defence products are repatriated into the country and if possible, specifically to its Defence sector. As per the Defence Procurement Procedure 2016, there are 6 avenues a foreign company can discharge these offset obligations – direct purchase/executing export of products/services of Indian Defence PSUs/OFBs/private sector, investment in defence manufacturing, Transfer of Technology to an Indian enterprise, transfer of equipment to an Indian enterprise, ToT/ToE to a Government institution and technology acquisition by DRDO. The new offset policy will result in the addition of three more avenues for discharging the offset obligation – investment in specified projects, investment in defence manufacturing/equity investment in an Indian enterprise and investment in specified funds for defence, aerospace and internal security that are regulated by the Securities and Exchange Board on India. These investments are expected to foster the development of internationally competitive defence, aerospace and internal security-related enterprises in India. Expanding the list of avenues through which offset obligation can be discharged, provides more options to the vendors and is a welcome change.
The DAP2020 is a sincere effort by the MoD to improve the procurement procedure and at the same time strengthen the MSMEs and the private sector in Indian Defence manufacturing. The thrust is given to the private sector in DAP 2020 through the Buy and Make (Indian) and is complemented by the increasing defence budget of India. Moreover, the DAP2020 focuses on technology instead of contract manufacturing and offers higher multipliers for technology transfer. New concepts are introduced in terms of long-term product support, leasing, price variation clause which are favourable to the private sector. The introduction of Artificial Intelligence, Military Materials, Indigenous software and Aero Engines are opening new avenues for the Indian private sector in defence manufacturing. Together with the new FDI policy and the handholding by the Defence PSUs such as Technology Development Fund implemented by DRDO, the DAP 2020 has presented a long-term vision and plan to strengthen the private sector in Indian defence manufacturing.